Cooper Tire and Rubber’s business is extremely complicated: they make tires. Their main competitors are Goodyear and Bridgestone. They manufacture and sell tires throughout the world. They operate in a highly competitive market with a commoditized product. Their business model is also impacted by the secular trend of the decline in domestic car driving (increasing use of things like ride sharing and Uber). The company could also be impacted by political headwinds. The Trump administration’s protectionist stance could impact tires that the company produces overseas and sell in the United States. At the same time, Trump’s desire to repeal the Affordable Care Act could help the company. It’s a mixed bag and it isn’t a particularly exciting business.

Sentiment

Year to date the stock is down 12.61% and it trades at an earnings yield of 11%. It is an unexciting company is a competitive, commoditized business and hasn’t participated in the bull run for stocks in the last year. The market doesn’t hate it, but it is indifferent to it.

My take

Despite the business pressures, the stock is cheap and the company is aggressively returning capital to shareholders. In the last five years, the number of common shares has been reduced by 18%. The balance sheet is clean with a low debt/equity and low debt/EBITDA. The clean balance sheet combined with the attractive valuation means that shares will continuously be repurchased at an attractive valuation.

Despite the competitive nature of the business, the company consistently generates stable free cash flow. This will give it the cash necessary to sustain the share buybacks. Return on equity and assets is low, but this isn’t a bad thing because no one in corporate America is saying: “Hey guys, let’s enter the tire business!”

Additionally, I think the sentiment about the secular decline of driving is overblown. While the growth rate has flattened since the Great Recession, the number of miles driven by Americans is not in decline. The total miles driven by Americans recently hit an all-time high of 3,193,010 in 2017. That’s a lot of driving and a lot of tires getting worn out and in need of replacement.